Video 7:03
Former Wall Street man says GFC lessons not learned

Once a high flyer for Goldman Sachs, Greg Smith now says the company's culture has turned for the worse while the industry issues that led to the Global Financial Crisis are unchanged.

Transcript

LEIGH SALES, PRESENTER: In March this year, a man named Greg Smith wrote a column for the New York Times titled, "Why I am leaving Goldman Sachs".

It attacked what smith considered a callous take-the-money-and-run mentality in the investment bank.

Well, the article went viral three million people read it.

The bank accused Mr Smith of being a disgruntled employee, unhappy because he missed out on a million-dollar bonus.

But the former trader has turned his column into a book called "Why I Left Goldman Sachs".

Mr Smith joined me from New York earlier.

Greg Smith, why did you decide to write your article for The New York Times?

GREG SMITH, FORMER MERCHANT BANKER: So, I'd been at Goldman Sachs for 12 years. It was my entire career. And I was a very strong advocate of the firm. I used to fly out to Stanford University twice a year. I appeared in a Goldman Sachs recruiting video. And ultimately, after the financial crisis where your viewers might know Goldman was forced to settle a half a billion dollar fraud suit with the Government, I had been drinking the Kool-Aid for a long time and believing that the firm was doing everything right. But I think when I took a hard look at some of the actions that took place in 2010 when Goldman did settle and you took a hard look, was the firm misrepresenting things to clients? And the answer I came up with was yes.

LEIGH SALES: You write that Goldman Sachs' great success has been due to its culture of teamwork, integrity, a spirit of humility and doing the right thing by its clients. You believe that culture has changed. What has caused it to change and what is the culture now?

GREG SMITH: So, early in the decade, you know, your viewers will know there was a string of deregulation that occurred which basically allowed banks to start betting with their own money and took complicated securities called derivatives that took them off exchanges and put them in the dark really to a point where nothing could be tracked. So, Goldman Sachs realises that it can actually make more money by using its clients' information to bet for itself as opposed to the old ideal of, "Let's partner with a client, let's collaborate, make money more slowly." And, you know, it's evident in Goldman's revenues. In 2002 Goldman made $5 billion in trading. By 2007 the firm's making $32 billion. Now, businesses don't grow five-fold in five years unless something meaningful has changed in the way you operate and think about your customers and the revenues translated into a change in behaviour to the point where it literally became an eat-what-you-kill, take-the-money-and-run mentality where I even feel the leadership of the firm does not necessarily have the long-run interests of the organisation at heart.

LEIGH SALES: So you decided to resign and to orchestrate the New York Times op-ed to coincide with that. What was the reaction when that came out?

GREG SMITH: You know, I did not know what the reaction was gonna be. I didn't even know if The New York Times was gonna publish it. but the reaction was massive in terms of the response I got. Within a day I got more than 4,000 messages from largely people not in the financial industry who have the sense that there is something very conflicted in - on Wall Street and in the financial industry, but I think the idea of speaking up about it or speaking through to power or calling something as being wrong when you saw it as being wrong resonated with people and I was very touched by a lot of the letters and emails and Facebook messages I got. But interestingly, I also heard from a lot of people from within the industry, including a number of Goldman managing directors, a number of clients who acknowledged that these problems are real. Yet, frankly, people are making too much money and there's not a lot of incentive to change a system that's working for people.

LEIGH SALES: The bank says that you're a disgruntled employee who wanted revenge after missing out on a million-dollar bonus and critics say that you don't have many examples in your book to back up your allegations. What do you say to that?

GREG SMITH: I would say a couple of things. I think Goldman has not had a lot of will to actually answer the real issues I raise about ripping of clients, of betting against them. And clearly they have tried to character assassinate me. The issue of compensation they raise, your viewers should know is a mandatory meeting where everyone on Wall Street has a thing called a compensation session. And if the firm asked you, "What is your career trajectory you want and what you want to get paid?," and you said to them, "Well, next year I'd like you to demote me and pay me 40 per cent less," they would think you're crazy. So, this idea of making a big deal about compensation is not accurate. And frankly, if I was concerned about enriching myself I either would have stayed at Goldman Sachs or I would've just left quietly and gone to Morgan Stanley or JPMorgan or some other bank.

LEIGH SALES: Do you think that doing this has affected your employability?

GREG SMITH: That's a good question. I certainly didn't do this to immediately go back and work on Wall Street again. But what I would say - and I saw this in a lot of the emails I got from just normal people who don't work on Wall Street - is I think Wall Street gets lost in its own bubble sometimes. And what I'd like your viewers to know is there's this perception out there that Wall Street is is it's about rich people gambling with other rich people's money. The little the secret that Wall Street doesn't want people to know is the real big investors in the market are the pension funds, the retirement funds, the mutual funds that hold people's savings. And I actually think there's a need and desire by people outside of Wall Street to want a greater fiduciary standard. The great irony of all of this is betting against clients, ripping off a teacher's pension fund, selling a philanthropy - a product they don't understand, these are actually technically legal. My whole point is these things should become illegal. And that's the whole reason no-one's gone to jail for the crisis is the system is effectively rigged so Wall Street makes all the profits on the upside, but when things go wrong it gets socialised to the public.

LEIGH SALES: What lessons, if any, did the financial industry learn from the Global Financial Crisis?

GREG SMITH: I think very few lessons have been learnt. And I'll give you an example: in the States there was a very big deal where JPMorgan lost more than $6 billion on bad trades. And this happened this past summer. And the CEO of the company gets called in front of Congress and he's trying to convince Congress that this was just some kind of hedge. The truth, and everyone on Wall Street knows, this was a reckless gamble. The five biggest banks in the States are actually bigger now than they were before the crisis and the biggest issues that led to the crisis, which were banks betting with their own money and complicated securities called derivatives, are still continuing unabated. So, I think there's this perception that things have been fixed, but in fact there's less competition and the bonuses are just as big and the behaviour's just as reckless, frankly.